Gasoil in the Mediterranean: emissions control zones and emerging opportunities

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Joel Hanley:

Hello and welcome to the Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. In this episode, we're looking at gas oil in the Mediterranean. Environmental standards have seen gas oil evolve over the years, but there are still plenty of opportunities for this major middle distillate. While it might not have the same cachet or brand as its fellow middle distillates jet fuel and diesel, gas oil remains a vital commodity for heating, power and fuel around the world. For a long time, it was the basis of the ICE Gasoil Futures contract, one of the world's busiest markets, but falling sulfur limits have seen it pass its crown to diesel, which is now a much larger market. Indeed, ultra-low sulfur diesel is made from hydrotreating gas oil itself and represents a 10 ppm sulfur market as opposed to gas oil with its .1% sulfur. But there is life in the old dog yet as many countries still rely on gas oil for a number of reasons, and its role as a marine fuel is set to grow.

That's because the latest emissions control zone coming to the Mediterranean from May this year will reduce the maximum sulfur emissions from shipping from .5% to .1%. Now that itself is such an important topic that I think you can expect to hear us do another podcast on the Oil Markets Podcast quite soon. So do look out for that. But back to the current market, let's talk about gas oil and its fundamentals and its close relationship to diesel, particularly in the Mediterranean, which is of course is a very diverse market. Lots of different needs, lots of countries bordering it. And who better to discuss this with than Virginie Malicier, our manager of middle distillate pricing and Jan Kedzior, our price reporter covering gas oil on a daily basis. Welcome both. Why don't we start with you Jan, tell us about the dynamics of gas oil because they do keep changing a bit and as I said, it's rather fragmented. So where are we at the moment in the Mediterranean?

 

Jan Kedzior:

Yeah, so over the last few years I think we've seen the North African countries play a more important role in the Med gas oil market. Traditionally in Europe, gas oil has been used as heating oil, but now France is set to reduce the sulfur content in heating oil from a thousand PPM to 50 ppm from January 2027. And the demand in Spain is mostly met domestically by the likes of Repsol and Cepsa. In recent years we've seen a lot of imports going to Libya, Algeria, and sometimes Egypt. Those important North African countries where gas oil is typically used as road fuel or is also used for power generation. And many of those countries could have underfunded power grids and there is need for people to use gas oil powered mobile power generators.

 

Joel Hanley:

And you mentioned France and Spain. What are the main uses for gas oil there? Is it agricultural, industrial power producing? What are they doing with it?

 

Jan Kedzior:

Yeah, so in France it's mostly used heating oil. It's called FOD Fuel Oil Domestique. In Spain, the situation is a bit different. Of course there is heating oil demand in Spain, but also Spanish government spec for gas oil is such that it allows gas oil to be used as marine gas oil .1 because of the flash point of 60 degrees. Also in our market and close assessment process, we have seen some activity from players who may wish to use .1 gas oil as marine fuel.

 

Joel Hanley:

Right. Interesting. You mentioned the MOC, the mark on close assessment process through which we assess our assessments here at Platts that used to see a lot of Russian diesel, a lot of Russian gas oil as well over the years. Obviously a huge emitter of these middle distillates was Russia, still is, but they don't really come to Europe so much anymore. Virginie, how did the Russian invasion of Ukraine and the following sanctions, how did that impact the diesel, the distillate market more generally, particularly in the Med but also elsewhere?

 

Virginie Malicier:

Yeah, so it had a big impact mostly in term of change of flow rather than a price impact because a company had many, many months to prepare for the upcoming sanctions that were applied over the past 25 months. And so now we can see Russian ultra low-sulfur diesel going to North Africa, going to West Africa, going to Latin America, and a lot also going to Turkey. And Europe gets no more supply from east of Suez, from the Middle East, the west coast of India, China sometime, and also the US Gulf coast. And in term of high-sulfur gas oil, so .1% gas oil, we see less supply in the Mediterranean. Why? Because Russia used to supply a lot of very high-sulfur gas oil, .7% that will go into the desulfurization unit of European refinery and this is not happening anymore. And also what we see now is there is also less .1% gas oil loading from the Black Sea from Russia and then supplying the Mediterranean market. The result is that sometime company have to use ULSD to supply .1 gas oil shots.

 

Joel Hanley:

Right, okay. So interesting you mentioned Latin America. Indeed, we launched an all-origin assessment of diesel down into Brazil. For example, when you say all-origin, it might as well be Russian, it's cheaper, you can deliver it into it. Whereas we've managed to disentangle Russian sanction barrels out of all of our refined products assessments around the world pretty much or certainly in Europe. Now you mentioned diesel actually, and that's an interesting point because there's a bit of competition between diesel and gas oil, traditionally it's always an interesting spread. I mentioned at the top of the podcast we have jet fuel and diesel and traditionally they priced off gas oil or nowadays off the Low Sulphur Gasoil contract that ICE had, which is essentially diesel. But there's a real interplay between diesel and gas oil seeing as one comes from the other. Jan, you're covering this market on a daily basis. What are you seeing?

 

Jan Kedzior:

Yeah, so in recent days we've seen weakening of diesel fundamentals in the Med at a time when there is very strong demand for gas oil. And on March 17th, Platts assessed .1 gas oil in the Med at the parity with 10 PPM diesel. Reflecting those changing fundamentals, most of that demand is coming from Algeria, Libya, those North African countries that we mentioned. And also to add on that point that Virginie made about Russian exports. To give a bit more background on the spec and different grades in the Mediterranean, the most important property is so-called cetane index, which is a measure of ignition quality In diesel engines.

The higher the cetane, the better. European regulations require 10 PPM diesel to have cetane of 46. But the likes of Algeria and Libya ask for cetane index of 48 or 50, which is very difficult to be met, especially for high sulfur gas oil. And this Russian product that used to come to those countries usually has high levels of cetane. So now not only we see less product available because of those Russian flows going to different regions. But also the available product doesn't have very good properties when we look at what's required by those North African countries, which is also exacerbating that let's say supply shortage in a way.

 

Joel Hanley:

Okay. And that's a pretty active market in North Africa. I mean what are we seeing there? Are there tenders, and it's a free market of course, but it tends not to operate so much on the spot market, is that fair to say?

 

Jan Kedzior:

Correct, yeah. So we would see national oil companies or governments issue tenders. So for example, in Lebanon we would see tenders, for example, for gas oil use for power generation. In Egypt, EGPC, Egyptian petroleum company would issue a tender for gas oil. Same in Libya and Algeria. Libya has been for many months the main importer of gas oil in the Med and it has one of the lowest prices of gasoline and diesel in the world together with the likes of Iran and Venezuela. And one of the things that we've seen as well is some of that subsidized fuel being smuggled to Sudan, Chad or Tunisia, which then means that probably the country is importing a bit more than it needs precisely because of some of that oil being smuggled.

And then also in West Africa we don't maybe see a lot of tenders. There's a lot of products supplied by commodity trading houses which are supplying on country by country basis. For example, looking at Russian diesel flows into West Africa in the offshore Lome market, which we are also assessing through our fob, West Africa 50 PPM diesel-gas oil assessment. We recently saw non-sanctioned diesel trading at a $15 premium to front month ICE GEO contract. And Russian diesel typically trades at a $25 discount. So it's interesting to see that spread between non-sanctioned 50 PPM gas oil and ultra-low sulfur diesel coming from Russia.

 

Joel Hanley:

That's interesting you mentioned the Middle East as well because of course so much Russian oil has gone to, well either the Middle East or China or in India, you mentioned West Coast India as well, and a lot of those refined products are just coming back. So essentially you're changing the molecules, cracking them down, and then we're just buying Russian oil straight back into areas where perhaps Russian crude oil can't travel. Those Middle Eastern refineries or indeed the big Indian refineries like Jamnagar or Ruwais in Abu Dhabi for example. Those are producing an awful lot. Are we seeing a big influx of middle distillates still from jet fuel, from Kuwait for example, that's still a bit of a heart of supply for Europe?

 

Virginie Malicier:

Yes. So most of the jet fuel supplied into Europe come from east of Sea. But no, most of the cargo bringing jet are taking the long route runs the Cape of Good Hope ever since the start of 2024. So now there has been a ceasefire and more shipowners are choosing to go through the Suez Canal and some trading company also prefer to take the Suez Canal route in the context of a backwardated market. So diesel has been typically backwardated at the beginning of March and jet is also currently in backwardation. But overall I would say that's the difference with before is that if they take the long route, they don't go through the Mediterranean so there will less supply coming to the Med.

 

Joel Hanley:

Right. That makes some sense with the Red Sea issues. And you mentioned shipping, that's a nice segue. Thank you, Virginie. I mean over the years you've seen just about everything in middle distillates markets. You've been doing it a long time. The Med-ECA, the emissions control zone that I mentioned, that's going to greatly reduce the sulfur limit from .5% to .1. So therefore marine gas oil has a real opportunity. It's not going to be ultra low sulfur marine fuel. Well I suppose it is. It's not going to be very low sulfur marine fuel. It's not going to be .5 anymore, at least not in the Mediterranean. The high seas, we still have the other rules, but that presumably is going to be a big draw for gas oil demand, that marine gas oil requirement from the ECA in the MED.

 

Virginie Malicier:

Yeah, so we've talked to a lot of market participants, lot of traders, market analysts, and we have our own analysts that will be mentioned at the next podcast on Med-ECA. But from the moment, from everything I heard, estimation in additional demand for 0.1 gas will vary between around 200,000 metric ton a month to 600,000 metric ton a month. So that is a lot of additional demand. We don't know yet how it will be met. Currently, Belgium and Netherlands ban exports of high sulfur road fell of above 50 ppm sulfur to any country outside of the European Union. So therefore blender cannot in area export product .1 gas oil to North Africa for road fell. But there is a possibility that it can be blended as DMA as marine gas oil. So that could be a potential source of supply.

 

Jan Kedzior:

And also to add to what Virginie is saying about Med-ECA, I think from the conversations we've been having, the consensus is that Med refiners may not be able to meet that demand and as such cargoes of DMA will have to be I imported from outside the region into the Med. ARA is most likely to be the biggest exporter of DMA. But we also heard of product potentially coming from Latin America or the Black Sea. The interesting difference between the DMA and the gas oil we discussed that typically goes to, for example, Libya or Algeria is that diesel and gas trade on escalated basis.

Which means that the prices adjusted according to the density of the product, whereas the DMA is trading on what's called as is basis where the price does not depend on the density and you normally see people supplying heavier product. And this is an important, I think, dynamic to mention because that sometimes makes it a bit more difficult to alternate between DMA and gas oil. However, we know that for example, most of the refiners in the ARA switch to producing DMA. So it's probably more of an opportunity for the DMA and some sort of risk for .1 gas oil

 

Joel Hanley:

Either way, another example of the shifting dynamics of gas oil. Thank you both very much for joining me in today's podcast and thank you for listening as well. And I should tell you that you can now have our latest forecast analysis on major market moving events delivered directly to your phone via WhatsApp. And it seems to me there are a lot more major market moving events than there used to be. S&p Global Commodity Insights First Take is the new channel available on WhatsApp. You just search for S&P Global Commodity Insights First Take in the channels tab of WhatsApp or you can follow the link in the show notes. Thank you very much.